Interest rates impact everyone from the individual saving their own money to the company managing an investment portfolio. Interest rates can increase or decrease and they are often tied to economic trends and influenced by factors like inflation, unemployment and economic growth. Interest rate rises generally make it more expensive to borrow money through credit cards, loans or mortgages. However, they also make it more attractive to save your money or invest it.
When rates rise, people who borrow money through home loans, credit card debt and auto financing typically feel the effects first because their monthly payments go up. In contrast, those who have savings in banks’ accounts, certificates of deposit or guaranteed investment certificates (GICs) benefit from the higher interest rates that institutions pay to attract new customers and retain existing ones.
In addition, when the Federal Reserve raises interest rates, it makes saving more attractive, slowing consumer spending and helping to control inflation. When consumers spend less, companies are less likely to take out loans and invest in expansion projects that require financing.
Certain businesses have historically performed well during periods of escalating interest rates, such as financial services companies including banks, credit unions, insurance firms and brokerage firms. This is because they are able to charge more for lending money and earn more in returns on their investments.